Philly Fed President “Puzzled” by Market’s Reaction to Fed Statement

By Johanna Bennett

The Philadelphia Fed President told CNBC today that policy makers were “puzzled” by the stock-market selloff last week when Fed Chairwoman Janet Yellen said interest rates may rise sooner than expected.

Charles Plosser, a voting member of the Fed’s policy committee, said Yellen’s timetable for a rate hike six months following the end of bond buying “wasn’t a wildly unexpected timeframe.”

Plosser told CNBC’s Squawk Box:

I don’t think the Fed changed its position, in fact, it tried to say explicitly in its statement we believe the forward guidance or the expect tons have not changed as far as we are concerned. So it is a little bit puzzling the market reacted the way it did. What you need to do is pay attention to what she said after her reference to the six months, which was it was going to be data dependent, it was going to depend on the outlook for inflation and improvement in the labor markets. Those are thing that will dictate when we considered raising rates

Plosser said short-term interest rates should hit 4% at the end of 2016, and he expects rates to rise above 3% by the end of next year. Plosser noted that his projections are higher than most of his colleagues.

Still, it all boils down to when the Fed ends its bond-buying program, he said. Yellen scaled purchases down to $55 billion a month last week. The bank plans to reduce the figure $10 billion a month, which would close the book on bond buying in October.

A fiscal hawk, The Philadelphia Fed President has been a critic of the Federal Reserve’s economic stimulus program. Plosser said there is a risk of volatility in the stock market as the Fed heads to the exit, calling it one of the “unintended consequences” of the Fed’s policy.

He told CNBC:

It is a gradual adjustment…The desire is not to shock the market to much. The question is will we be able to pull that off. Will the market be patient with us…

Amey Stone is Barron’s Income Investing blogger and Current Yield columnist. She was formerly a managing editor at CBS MoneyWatch, MSN Money and AOL DailyFinance. Her responsibilities included overseeing market coverage and personal finance topics. Prior to those roles, she was a senior writer at BusinessWeek where she authored the Street Wise column online and contributed to the magazine’s Inside Wall Street column. Topics covered included economics, corporate finance, Fed policy, municipal bonds, mutual funds and dividend investing. She co-authored King of Capital, a biography of Citigroup Chairman Sandy Weill. She is a graduate of Yale University and Columbia University’s Graduate School of Journalism.